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Better Buy: MasterCard Incorporated or Visa Inc.?

By Dan Caplinger - Jan 14, 2016 at 11:37AM

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Both of these card network giants have done well lately. Which looks more promising?

Image source: Flickr user Morgan.

The global economy has continued its move toward embracing electronic payments, and that's been good news for payment network giants MasterCard (MA 1.97%) and Visa (V 0.88%). Both stocks rose modestly in 2015, outpacing the broader stock market and showing the respective strength in their business operations. Yet many investors want to know which stock is a better buy right now. Let's compare MasterCard and Visa on a number of metrics to see which makes more sense right now.

Both MasterCard and Visa have gained ground over the past year. Visa stock has posted a slightly stronger return of about 14%, outpacing MasterCard's 10% rise by a small margin.

The strength of both stocks has led to earnings multiples that are well above the market average. On a trailing basis, both Visa and MasterCard trade at about 28 to 29 times earnings, with no truly substantial difference between the two. Those high multiples take into account high expectations for future growth, but even on a forward basis, MasterCard and Visa remain close to each other in the range of 22 to 23 times estimates. That leaves relatively little to distinguish the two card giants on a valuation basis.

For dividend investors, neither MasterCard nor Visa look particularly attractive, but there's little to differentiate them from each other. Both stocks carry yields of less than 1%, with MasterCard eking out the tiniest of leads at 0.84% versus 0.76% for Visa.

The main problem is that neither company has made dividends a priority. Both Visa and MasterCard have payout ratios below 20%, indicating that although they have ample earnings to pay a higher dividend, they've chosen not to do so. Even so, both companies have made regular increases to their payouts. MasterCard's most recent 19% boost came last month, while Visa made its 17% rise in October.

Regular past increases have shown that both MasterCard and Visa want to look like they're sharing more of their earnings with shareholders, but they've largely chosen alternative methods of returning capital such as share buybacks rather than committing to regular quarterly dividends. Neither stock shows a big advantage on the dividend front.

Fundamentally, both MasterCard and Visa have done a good job of producing rising revenue and earnings. In its most recent quarter, Visa saw net operating revenue climb 11% to $3.6 billion, even as the card giant managed to overcome headwinds from the strength of the U.S. dollar. Net income jumped 12% to $1.5 billion, and CEO Charlie Scharf noted that strong payments volumes as well as new and renewed partnerships with issuing banks and corporate sponsorships helped to drive Visa's growth. The company expects the dollar to remain a challenge but for strong growth to continue into 2016 and beyond.

MasterCard has also benefited from overall growth in the industry, but it has taken a much larger hit from the strength of the dollar. Revenue in MasterCard's most recent quarter rose just 1.6% to $2.53 billion, and on a GAAP basis, net income actually fell 4% to $977 million. The dollar cost MasterCard 10 full percentage points of revenue growth, and a constant currency measurement would have improved MasterCard's earnings growth by 11 percentage points. Nevertheless, in local-currency terms, MasterCard showed solid results throughout its geographical segments, and CEO Ajay Banga foresees further gains in volumes even with uncertainties in the global economy.

For those looking to choose between Visa and MasterCard, the difficulty is finding major differences between the two. On a growth basis, Visa appears better positioned to deal with currency challenges, but if the world economy turns around and the dollar starts to weaken, MasterCard would be the better bet. That's a macroeconomic call that investors will have to make for themselves.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Mastercard Incorporated Stock Quote
Mastercard Incorporated
$353.38 (1.97%) $6.84
Visa Inc. Stock Quote
Visa Inc.
$211.72 (0.88%) $1.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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